PROTECTIVE LIFE INSURANCE CO. v. HANSEN (January 19, 2011)

B&K Enterprizes, a Wisconsin limited liability company, operated a gasoline service station in Manitowoc, Wisconsin. Richard McDonald was a founding member of B&K and managed the station’s day-to-day affairs. B&K purchased a $1 million life insurance policy on McDonald from Protective Life Insurance Co. It then financed the operations by assigning its interest in the insurance proceeds as security for several loans. After an audit established that McDonald had misappropriated funds from and mismanaged B&K, the other LLC members removed McDonald -- but it was too late. The members hired Michael Culligan to wind up operations and liquidate the company. Culligan submitted a form to Protective to transfer ownership of the insurance policy from B&K to McDonald. Because the policy erroneously identified B&K as a corporation, Protective returned the form to Culligan for a second officer’s signature (one signature was sufficient for an LLC). Culligan never resubmitted the form. Under the impression that he was the new owner of the policy, McDonald submitted a change of beneficiary form substituting Megan Hansen, a woman he had been dating, for B&K. McDonald then committed suicide. Protective filed an interpleader action naming both B&K and Hansen. Judge Griesbach (E.D. Wis.) entered judgment for B&K. Hanson appeals.

In their opinion, Seventh Circuit Judges Bauer, Wood, and Williams affirmed. The Court noted that Hansen presented a multi-layered argument. She first asked that the original contract be reformed to accurately indicate B&K’s status as a limited liability company instead of a corporation. She then asks that Culligan's request to transfer ownership to McDonald be effectuated on the theory that Protective's policy was to grant such a request from a limited liability company on one signature. Finally, she asks to give effect to McDonald's request to change beneficiaries. The Court assumed, without deciding, that Hansen could succeed in reforming the policy to reflect B&K’s accurate corporate form. It rejected, however, her additional requests. Reformation is available only if the document fails to reflect the parties' intent. Hansen's requests to give effect to Culligan’s request to change ownership and McDonald’s request to change beneficiaries do not fit within that legal theory – and the Court could identify no other theory that could achieve Hansen's goals. What matters is what happened – not what Hansen speculates would have happened if the policy properly identified B&K. The Court also rejected Hansen’s third party beneficiary argument. Finally, the Court noted its agreement with the district court's conclusion that reformation, as an equitable remedy, would be inappropriate even if all of its elements were satisfied. Here, the equities heavily favor being B&K and reformation would be improper.